"You are appointed as an inventory manager in a manufacturing firm. The company is facing problems of both overstocking and frequent stockouts,…

Different method of Inventory Control by Setting Quantitative Levels are explained below: (i) Re-order Stock Level (ROL): This level lies between minimum and the maximum levels in such a way that before the material ordered is received into the stores, there is sufficient quantity in hand to cover both normal and abnormal consumption situations. In other words, it is the level at which fresh order should be placed for replenishment of stock. It is calculated as: ROL = Maximum Consumption x Maximum Re-order Period Or ROL = Minimum Stock Level + (Average Rate of Consumption x Average Re-order period) (ii) Re-Order Quantity: Re-order quantity is the quantity of materials for which purchase requisition is made by the store department. While setting the quantity to be re-ordered, consideration is given to the maintenance of minimum level of stock, re-order level, minimum delivery time and the most important the cost. Hence, the quantity should be where, the total of carrying cost and ordering cost is at minimum. For this purpose, an economic order quantity should be calculated. Economic Order Quantity (EOQ): The size of an order for which total of ordering and carrying cost are minimum. EOQ = √(2 × Annual Requirement (A) × Cost per order (O) / Carrying Cost per unit per annum (C)) (iii) Minimum Stock Level: It is lowest level of material stock, which must be maintained in hand at all times, so that there is no stoppage of production due to non-availability of inventory. It is calculated as below: Minimum Stock Level = Re-order Stock Level - (Average Consumption Rate x Average Re-order Period) (iv) Maximum Stock Level: It is the highest level of quantity for any material which can be held in stock at any time. Any quantity beyond this level cause extra amount of expenditure due to engagement of fund, cost of storage, obsolescence etc. It can be calculated as below: Maximum Stock Level = Re-order Level + Re-order Quantity - (Minimum Consumption Rate x Minimum Re-order Period) Here, Re-order Quantity may be EOQ (v) Average Inventory Level: This is the quantity of material that is normally held in stock over a period. It is also known as normal stock level. It can be calculated as below: Average Stock Level = Minimum Stock Level + 1/2 Re-order Quantity Alternatively, it can be calculated as below: Average Stock Level = (Maximum Stock Level + Minimum Stock Level) / 2 (vi) Danger level: It is the level at which normal issues of the raw material inventory are stopped and emergency issues are only made. It can be calculated as below: Danger Level = Average Consumption* x Lead time for emergency purchase *Some time minimum consumption is also used. (vii) Buffer Stock: Some quantity of stock may be kept for contingency to be used in case of sudden order, such stock is known as buffer stock.